Iraq auctions gas fields in bid to develop a new industry

October 19, 2010

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By , BAGHDAD, Oct 19 – Iraq hopes that an auction of three gas fields on Wednesday will attract international investment to fuel the development of its virtually untapped reserves and see it emerge as a major gas producer.

But the auction has already been postponed twice, one firm has decided not to bid after all, another says it is unlikely to, and not a single US company has registered.

"Wednesday\’s auction aims to increase gas production to supply local needs, generate electricity, fuel factories and place Iraq among the regional and international gas producers and exporters," oil ministry spokesman Assim Jihad told AFP.

French oil giant Total, Japan\’s Mitsubishi and competitors from Russia, South Korea, Turkey and India are among 13 companies eligible to bid in an auction that some analysts say is a hard sell for Iraq.

Iraq, which this month upped its figure for proven oil reserves by nearly a quarter and reported its wealth at 143.1 billion barrels of proven crude — one of the world\’s very largest — is hoping the auctions will do for its gas fields what they did last year for its oil industry.

In two bid rounds last year foreign firms snapped up contracts to develop 10 oilfields, which Baghdad is tapping in an ambitious bid to eventually raise crude output from the current 2.4 million barrels per day (bpd) to between 10 and 12 million bpd — larger even than oil heavyweight Saudi Arabia.

Oil Minister Hussein al-Shahristani said in May that, as with the oil contracts, the gas projects on offer would be service agreements, under which Baghdad pays the foreign company fixed fees based on production quotas rather than a share of profits based on sales.

"It will be very challenging for Iraq to award these contracts," said Ruba Husari, the founder and editor of iraqoilforum.com. "The oil auction was easier because the transport pipelines are already in place, but for gas they will have to be built from scratch. That means larger investment," she said.

"Gas is different from oil. It needs higher investment and a different contractual agreement" than the fixed price scheme offered for oil, said Husari.

"Companies will not be killing themselves to get their hands on these fields," she told AFP, adding that development costs included construction of pipelines to power-generators, factories or export terminals.

Norway\’s Statoil and Edison of Italy are among the 13 eligible bidders, but the former has reportedly said it has decided not to participate and the latter that it is unlikely to.

Potential bidders do not include a single company from the United States, which has been keen to attract foreign investment to boost Iraq\’s economy before a planned military pullout at the end of 2011.

"There is a reasonable amount of interest, especially among companies already operating in the Middle East," said Richard Quin, lead analyst for Wood Mackenzie in Edinburgh.

"But for the majors it is probably a question of return on investment and materiality. Returns are quicker and more straightforward for oil than for gas," he said.

Alexander Poegl of JBC Energy in Vienna said that regional companies, including from Kuwait and Turkey, were interested in fields that lay close to their borders. But he said things were complicated because Iraq wanted to use some of the gas for domestic use and some for exports.

"The volumes are quite significant, but perhaps not to meet domestic needs and export," he said. "To build a network from scratch the volumes are not in place," he added.

Akkaz, west of Baghdad in Anbar province, is the largest with about 158 bcm (5.6 tcf). Mansuriyah in Diyala province, 100 kilometres (60 miles) northeast of Baghdad, has reserves of around 127 bcm (4.5 tcf). Both, in provinces where the authorities have been battling insurgents, were offered in Iraq\’s first round of bidding on June 30 but not awarded.

The third field is Siba, located in the southern province of Basra near the borders of Iran and Kuwait, with reserves of 31 bcm (1.1 tcf).